Time-Varying Uncertainty of the Federal Reserve's Output Gap Estimate

Travis Berge

The Review of Economics and Statistics, 2023, vol. 105, issue 5, 1191-1206

Abstract: A factor stochastic volatility model estimates the common component to output gap estimates produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The output gap estimates are uncertain even well after the fact. Nevertheless, the common component is clearly procyclical, and positive innovations to the common component produce movements in macroeconomic variables consistent with an increase in aggregate demand. Heightened macroeconomic uncertainty, as measured by the common component's volatility, leads to persistently negative economic responses.

Date: 2023
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Working Paper: Time-varying Uncertainty of the Federal Reserve’s Output Gap Estimate (2021)
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